A U.S.bank issues a 1-year, $1 million U.S.CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in 1 year upon maturity of the CD.Spot exchange rates are US $0.78493 per Canadian dollar. If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.
A)Profit of US $20,000.
B)Loss of C $224,000
C)Profit of US $50,000.
D)Profit of C $63,000.
E)Profit of US $313,000.

Question

Quizplus · Accepted Answer

The correct answer is A.The bank will receive US $50,000 in interest on the CD and C $89,180 in interest on the Canadian bonds. The bank will have to pay C $1.274 million to redeem the Canadian bonds. The bank will receive US $1 million from the CD. The bank will have a profit of US $20,000.

A USBank Issues a 1-Year, $1 Million U